FxWirePro: Symbolic decision to boost up FX inflows in China – USD/CNH options trade strategies

MSCI said yesterday it will include China large cap A-shares in the MSCI Emerging Markets Index and the MSCI All-Country World Index (ACWI). It will add 222 A-shares (stocks traded in China’s two main exchanges, the Shanghai and Shenzhen stock exchanges) which will represent 0.7% weight in the MSCI Emerging Market Index which is tracked by USD1.6trn of funds. It will be done incrementally, in a two-step procedure, following reviews in May-2018 and then August-2018. MSCI rejected China’s inclusion in the previous three years but noted the key game changer was improved accessibility to the share market. This was mainly due to the expansion of the Stock Connect between HK to both Shanghai and Shenzhen.

Overall, the decision is a major step to China’s efforts to attract foreign funds into the world’s 2nd largest stock market which has a market capitalization of just under USD8trn. MSCI estimates that it could lead to USD17-18bn of initial inflows. However, this is just over ¼ of the combined average daily trading turnover of USD65bn in the local stock market.

As such, today’s decision is probably more symbolic rather than significant for implications for short-term inflows. In terms of implications for CNY and the possibility of further FX liberalization, the jury is still out. In fact, the recent introduction of the “counter-cyclical adjustment factor” suggests the bias is tilted towards control and stability. For USD-CNY, it was largely unchanged around 6.8320 this morning.

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